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You Must Be Invested in China

If you are an investor with a long-term time horizon, you must be invested in China.

Sound crazy?
On a recent flight from Beijing to Hong Kong, a professor at the University of Western Australia told me, "In 25 years, this will be the most powerful and advanced country in the world. There will be more wealth created in the build-out of China than in any country in history."

Given that this gentleman had just come from lecturing at a conference on disruptive innovation, I'm inclined to believe him. The focus of his conference was "destroying markets."

"Wow," I told him. "That sounds violent and painful."

"It is, and the Chinese people are ready," he replied -- with a huge grin on his face.

Yes, I just returned from China
If you've never been to China, let me paint a clear picture of the Shanghai skyline (at least, the one I'm familiar with -- 38 floors up, from a hotel window). First, there are massive buildings everywhere, and there are even more cranes building new structures. Caterpillar (NYSE: CAT  ) logos were all over those cranes -- something Caterpillar investors should be happy about, as the company made "continued growth in China" a key strategy in its last 10-K.

The construction-equipment giant is betting on Chinese infrastructure development, going so far as to relocate its Asian headquarters from Japan to Beijing. Indeed, the energy level is frenetic, with construction crews working around the clock -- noise is everywhere, as is a palpable sense of excitement. It's similar to the hustle and bustle of New York, but more purposeful and electric. (And the cab drivers in China make New York cabbies look like wimps. Buckle up!)

Growing pains
While in China, though, any news station would've showed the rescue and rebuilding efforts after the earthquake in Sichuan -- which makes you realize that so much of China is still struggling. One-third of the country is pedaling like mad to lead the world in the 21st century, and the rest, mostly in the middle and western parts of the country, is still living in 1850.

It occurred to me that even though I was looking at China, it may as well have been the United States in the early 1800s -- all of the eastern cities are being developed, while much of the west stays disconnected and untapped. I can only imagine what will happen when all of the energy, power, and purpose of Shanghai and Beijing are brought to bear on the entire country of 1.3 billion people.

The obvious and relevant point here is that despite China being 6,000 years old, it is in the earliest stages of development and modern wealth-creation. As an investor, this makes me anxious to understand China and how I should be investing there. With an annualized GDP growth of 10% for the past two decades, China offers investment opportunities that surpass anything you'll find in the United States.

Stop. [Throws cold water on face.]
But wait -- hasn't the Chinese stock market been crushed lately? Isn't it half of where it was just eight months ago? Yes and yes. It's kind of like what happened here in 2000-2002. Wow, that was such a horrible time to ... wait ... that was a great time to invest! Over the next five years, $14,231 invested in the S&P 500-tracking SPDRs (AMEX: SPY  ) would have turned into $18,919 with dividends reinvested. The then-pummeled Nasdaq 100-tracking Cubes (Nasdaq: QQQQ  ) has done about as well.

So, then, how do we play China? One very simple way to invest in China is with U.S.-based companies that are expanding their operations there. Caterpillar, mentioned earlier, is one such example. Yum! Brands (NYSE: YUM  ) has more than 2,500 units, most of them Kentucky Fried Chicken locations, in China.

Even as it scales back new stores here in the United States, Starbucks (Nasdaq: SBUX  ) is rapidly expanding and considers China its most important growth market. Cisco Systems (Nasdaq: CSCO  ) is helping build out the network infrastructure of the country; Intel (Nasdaq: INTC  ) has had manufacturing facilities in China for more than a decade. All of the Fortune 500 companies are either building business units in China or being chastised by their investors for not figuring out how to enter that market.

Investing in any of these U.S.-based companies is a decent way to get Chinese exposure. Of course, they're not pure plays, and so the net contribution from China is diluted and incremental to their existing revenue streams. In other words, investing in these companies to get the full value of investing in China is like riding Soarin' at Epcot to get the full excitement of hang-gliding. In order to enjoy the huge benefits of investing in China, I believe you need to invest in some of the smaller and more entrepreneurial Chinese-based companies.

Need a few ideas? Motley Fool Global Gains advisor Bill Mann just returned from a research trip to China, as well as Singapore, Indonesia, and Vietnam. You can access his three best ideas from the trip -- all of which are Chinese "state-sponsored entrepreneurs" -- with a free 30-day trial of Global Gains. Just click here for all the info.

David "Bogey" Forrest owns shares of an S&P 500 Index fund, but none of the companies mentioned in this article. Starbucks and Intel are Inside Value recommendations. Starbucks is also a Stock Advisor selection. The Motley Fool owns shares of Starbucks and SPDRs. The Foolish disclosure policy destroys markers.

Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2008, at 11:01 PM, davenerven wrote:

    In my opinion, there is a serious population demographic problem with China. Their one child per family policy means that the replacement working population will decrease by 40-50% within a generation. Furthermore, the skillset of the current working generation will be outdated as technologies and techniques advance, rendering them redundant or uncompetitive. This means that a future Chinese worker is likely to be burdened by the cost of supporting his parents and grandparents without the help of siblings. The social care system in China will not be able to support such a vast increase in demand for old age care.

  • Report this Comment On July 09, 2008, at 12:01 PM, fongfong200 wrote:

    In response to the previous commentator, there is a flaw in his logic. The commentator noted the changing demographic, the changing skillset, but assumed the social care system would remain unchanged. This is a flawed assumption.

  • Report this Comment On July 09, 2008, at 5:52 PM, pjcox3 wrote:

    If the social care system is not working, unlike the US, China will fix it

  • Report this Comment On July 09, 2008, at 10:48 PM, runs50s wrote:

    I would agree with the previous post. China won't wait to fix a social care system, unlike the U.S. since they don't have the internal political problems the U.S. have with Republicans vs. Democrats, liberal vs. conservative, lobbyists seizing control of the U.S. Congress etc. The government of China I I think do very well in recognzing problems within the social framework and then taking measures to solve. Sure China has problems, and there area corrupt segments within China...but anyone remember Chicago, NY, Kansas City and other areas of the U.S. where rampant corruption existed (and still does today). I've been working and living in China off/on for past 4 years...and I'm continually amazed at what I see in China. I also agree that anyone would be missing out if not invested in China's future.

  • Report this Comment On July 10, 2008, at 3:32 PM, itsmoney2me wrote:

    I would stay FAR away from China for a pure play as their economic engine is going to outstrip their ability to find enough oil and raw materials to support it. Factor in the "potential" for political instability due to food and commodities going up in price and you have the recipe for serious economic and social turmoil.

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